Yesterday it was announced that the Act on Management and Supervision (the "Act") will enter into force on 1 January 2013.
In this Corporate Alert we will discuss the most important changes as a consequence of the Act.
2. Significant changes
Legal basis for a one-tier board system
The Act will provide a legal basis for the one-tier board system within NVs or BVs, comprising both executive and non-executive members, as an alternative to the existing two-tier board system. Although an NV or a BV could already have a one-tier board system, there was not yet an explicit legal basis for it.
- One-tier board. In the one-tier board system, the tasks within the management board are divided between the executive and non-executive members of the management board. The executive members will be responsible for the company's daily management; the non-executive members will have at least the statutory task of supervising the management board in the performance of their management duties. The general course of affairs of the company will be the responsibility of all board members, both executive and non-executive. The non-executive members in a one-tier board system are part of the management board and are therefore subject to director's liability. The non-executive members are directly involved in the decision-making process and as a result have a direct influence on the passing of board resolutions.
- Two-tier board. In the two-tier board system, the supervisory board is a separate corporate body. Therefore, the supervisory board members have less influence on the decision-making process of the management board. A supervisory board member will as such not be responsible for the management of the company, but will only be responsible for the supervision of the management board.
Conflict of interest
The provisions that govern a situation where there is a conflict of interest between a management board member and a company will be amended. At present, legislation provides for a restriction on the authority of management board members to represent the company externally. The Act will replace this external effect by an internal impact on the decision-making process. A similar provision will apply to supervisory board members.
- Current legislation. If a management board member has a conflict of interest, the authority of all management board members to represent the company will be affected. The company will in such instance be represented by the supervisory board members. The articles of association of a company may include other provisions. However, the general meeting will remain authorised to appoint another person to represent the company in such cases.
If a management board member with a conflicting interest acts on behalf of the company despite being unauthorised, the company or receiver in bankruptcy may institute proceedings to have such legal act annulled, if and to the extent that the other party was aware or should have been aware that there was a conflict of interest. The external effect of such annulment may be detrimental to the other party concerned, and may lead to legal uncertainty.
- New legislation. A management board member with a conflicting interest must abstain from participating in the decision-making process with respect to the relevant matter. If, however, it becomes apparent that such member was indeed involved in the decision-making process, then such decision may be nullified. The same rules apply to supervisory board members and decisions of the supervisory board.
If all management board members have a conflicting interest with the company, the supervisory board will decide. If the company does not have a supervisory board, the general meeting will decide on the matter, unless the articles of association state otherwise, i.e. that such resolution should be passed by another corporate body of the company, a third party, or the management board, regardless of the conflict of interest.
If all supervisory board members have a conflicting interest, the articles of association may for instance provide that the management board will resolve on the matter, or that the supervisory board will nevertheless resolve. If the articles of association do not include such a provision, the general meeting will resolve on the matter.
A conflict of interest situation will as a rule only have an internal effect. A provision in the articles of association stating that the management board member concerned is not authorised to represent the company in the event of a conflict of interest, as is currently customary, will no longer be valid. Management board members with a conflict of interest remain authorised to represent the company, regardless of any provision in the articles of association to the contrary. However, the relevant management board members may under certain circumstances be held personally liable for any damage suffered by the company as a consequence of the transaction.
Agreements entered into with third parties contrary to the new rules on decision-making in the case of a conflict of interest, may as a rule not be annulled. Only under special circumstances will a company be able to annul an agreement or claim damages if a third party misuses a conflict of interest situation.
- Transitional provision. The current system will remain in place for all legal acts entered into prior to the entry into force of the Act. The risk of a future claim of nullity of these acts may be set aside if the general meeting ratifies such acts by retroactively appointing the relevant management board member as representative of the company for the specific situation, despite the existence of a conflict of interest.
Limitations on the number of positions of board members
The Act will provide a maximum number of positions that each member of a management or supervisory board of a "large" NV, BV or foundation is allowed to hold.
- General rule. A person may not be appointed as managing director of a "large" company if he or she has two or more other supervisory positions with other large companies or foundations, or if he or she is a chairman of a supervisory board or a one-tier board of another "large" company or foundation. Supervisory directors will be prohibited from holding more than five supervisory positions including the "new position". Chairmanship of a supervisory board or a one-tier board will count as two supervisory positions.
For the purposes of this rule, a supervisory position includes non-executive directors of a one-tier board. Executive directors are deemed to be managing directors for these purposes. Managing directors of foundations who in fact only have a supervisory role, while the executive management is carried out by persons who are not formally statutory directors, are nevertheless deemed to be managing directors. Executive managers who are not statutory directors are not subject to this rule.
Definition "large" company or foundation. A company or foundation is "large" for these purposes if at least two of the following qualifications apply:
- the value of the assets according to the balance sheet with explanatory notes exceeds EUR 17.5 million (based on the acquisition or manufacturing price);
- the net turnover exceeds EUR 35 million;
- the average number of employees is at least 250.
Similar to the obligation to publish annual accounts, a company or foundation is only "large" if on two consecutive balance sheet dates, without interruption thereafter, at least two of these criteria apply. Conversely, a company or foundation will cease to be subject to the rule if not at least two of the criteria continue to apply to it on two consecutive balance sheet dates.
The consolidated accounts must be used for the application of the abovementioned criteria.
The limitation rule only applies to a foundation that (i) operates a business and is obligated to publish annual accounts in accordance with title 9 of Book 2 of the Dutch Civil Code or (ii) is obligated pursuant to specific legislation to publish financial information on an annual basis that is identical or similar to annual accounts within the meaning of title 9 of Book 2 of the Dutch Civil Code (such as health care or public housing foundations). For foundations, instead of net turnover, the second criterion above is based on the total operating income or total income to the extent that the foundation includes this information in its accounts pursuant to specific legislation.
- Exceptions. The limitations on the number of positions do not apply to appointments that have taken place prior to the entry into force of the Act. However, the limitations will apply to reappointments.
Supervisory positions at the following entities will not be taken into account for purposes of the limitation rule: group companies, foreign legal entities, associations, cooperatives and mutual funds. The same applies to temporary appointments by the Enterprise Chamber of the Amsterdam Court of Appeals in connection with the so-called inquiry proceedings.
- Sanction. The appointment of a member of a management or supervisory board will be void if the number of supervisory positions held by such member exceeds the maximum number allowed. However, this does not affect the validity of resolutions adopted by the board if the relevant board member was involved with the decision-making. Furthermore, an appointment in violation of the limitation rule only affects that particular appointment, and not previous board appointments of such person.
- Changes after appointment. The test of the limitation rule is only applied at the moment of appointment. Later changes are not relevant for these purposes. This is also the case if the entity was not "large" at the moment of appointment, but becomes "large" at a later stage. The appointments will in such cases remain valid, and the qualification of "large" will become relevant at the moment of reappointment. It is unclear however, what the consequence would be if a supervisory board appoints a chairman from its members, resulting in that person exceeding the prescribed limitations. We assume that such an appointment as chairman would be valid. Nevertheless, the appointment as chairman could become an impediment in the case of later appointments or reappointments.
Large NVs and BVs will be required to strive for a balanced composition of their management and supervisory boards, to the effect that at least 30% of the positions on the management and supervisory boards are held by women and at least 30% by men.
With this rule, the legislator aims to increase the participation of women on the company boards of large NVs and BVs. This provision will lapse on 1 January 2016, but may be extended prior to this date. It does not apply to foundations.
For the question whether an NV or BV is "large" for the purposes of the gender diversity rule, the same criteria apply as set out above in relation to limitations on the number of positions of board members. The Act does not specify whether it is also required in this context that, on the one hand, at least two of the criteria be met on two consecutive balance sheet dates for the rules to apply, and on the other hand, that at least two of the criteria not be met on two consecutive balance sheet dates for the rules to cease to apply. We would think, though, that this rule then also applies.
There is no legal sanction if the composition of a company's board is not balanced in accordance with the Act. An appointment contrary to the rule to strive for gender diversity as prescribed, will therefore not be considered void. However, the company must explain any non-compliance with the 30% criteria in its annual report. The explanation must include the reasons for non-compliance and the actions with which the company intends to comply in the future. The general meeting of the company may then determine its position and, if deemed necessary, address the management board and supervisory board on taking appropriate action.
The Act will bring an end to the current requirement in relation to binding nominations for managing or supervisory board directors of an NV that the nomination consists of at least two persons. Under the new rules, the nomination may consist of one candidate. A similar change will apply to the BV as from 1 October pursuant to the new Flex BV rules.
Allocation of tasks between board members
Pursuant to the new rules, the articles of association of a company may provide for an allocation of tasks between managing directors, directly or indirectly through board rules. An allocation of tasks does not prejudice the collective responsibility of all members of the management board. Each managing director will remain responsible for the management tasks performed by the management board, the general course of business and the resolutions adopted by the management board.
If the company has a one-tier board, the articles of association may also provide for the authority of managing directors, individually or together with others, to resolve on matters that fall within the scope of their tasks. These resolutions will still be attributed to the entire management board.
Also under the current rules it is to some extent possible to allocate tasks between managing directors. This applies to all legal entities under Book 2 of the Dutch Civil Code. The Act provides more clarity about the extent of the possibilities to allocate tasks, the consequences for decision-making, responsibilities and possible liability.
If the company suffers damage as a result of mismanagement, the main rule is that all management board members are liable, unless as a result of the allocation of tasks to other management board members, no serious blame can be attributed to a member. Individual members of the management board can claim exculpation, if they can prove that they were not negligent in taking measures to avoid the results of the mismanagement. An allocation of tasks can be a relevant factor in that respect.
An allocation of tasks will not discharge a management board member from keeping an eye on the activities of his or her fellow management board members. Management board members have an obligation to make inquiries into the management performed by their fellow members periodically, and to act in case of imminent mismanagement, even if this is contrary to the task allocation adopted.
The articles of association may also provide for an allocation of tasks between supervisory board members, or in the case of a one-tier board between non-executive directors, directly or indirectly through board rules.
Managing director no longer an employee
The legal relationship between a management board member and a listed company can no longer be qualified as an employment agreement. The arrangement will be qualified as an assignment. As a result, the management board members will no longer have the protection provided by Dutch employment law, such as compensation in case of dissolution or unfair dismissal.
In addition, as a consequence of this provision management board members of listed companies will no longer be protected against dismissal in case of illness or pregnancy. Also, such persons may no longer be allowed to participate in collective pension arrangements. There is no change from a tax perspective; the relationship will continue to be regarded as a notional employment agreement for Dutch income tax purposes.
- Transitional provision. Existing employment agreements will be respected, but it will no longer be possible for a management board member to enter into a new employment agreement with the company. It will remain possible for a management board member to enter into an employment agreement with a subsidiary of a listed company.
3. Action Required?
It will not be necessary to amend the articles of association of a company prior to the entry into force of the Act. If prior thereto the articles of association of a company are to be amended for other reasons one could already anticipate on the Act by making the following changes:
- The basic principle of an allocation of tasks between the management board members may already be included in the articles of association of a company. The allocation of tasks can subsequently be specified in the rules of the management board.
- A provision covering the decision-making process of the company boards in situations where there is a conflict of interest may be included.
- If the articles of association contain provisions regarding a binding nomination for the appointment of managing directors or supervisory directors, whereby it is provided that the nomination should consist of at least two candidates, this explicit provision may be replaced by a reference to the statutory provision. That way, upon the entry into force of the Act, the cancellation of the requirement that the nomination consist of at least two candidates, will automatically find its way into the articles of association.
What to do following entry into force of the Act?
We advise the following actions:
- Amend the articles of association of the company in order to comply with the new conflict of interest rules.
The new statutory provisions are mandatory and also applicable without amending the articles of association of a company, but it might be confusing if the articles of association include a provision that is contrary to the law. The proposal for such amendment of the articles of association can be placed on the agenda for the first general meeting to be held after the Act has entered into force.
Amend the internal procedures, if available, regarding:
- the course of action to be taken if a conflict of interest arises;
- the appointment of new members of the company boards; and
- the disclosure of information regarding other board positions of members of the company boards (only if the company qualifies as a "large" company).
- If the articles of association contain provisions regarding a binding nomination for the appointment of managing directors or supervisory directors, whereby it is provided that the nomination should consist of at least two candidates, this requirement may be deleted.
- If deemed necessary: the drawing up of a written allocation of tasks between management board members, for example in the rules of the management board.